Published: Thursday, November 22, 2012 at 11:21 p.m.

Last Modified: Thursday, November 22, 2012 at 11:21 p.m.

Struggling Southwest Florida homeowners have saved thousands of dollars from a popular tax break on forgiven mortgage debt.

Facts

AT A GLANCE

What: Under a 2007 law, homeowners do not pay federal income taxes on mortgage debt forgiven by lenders on short sales, loan modifications or foreclosures.

What’s new: The Mortgage Forgiveness Debt Relief Act is scheduled to expire this year, prompting a wave of short sales.

What’s next: Congress may extend the law for another year.

LOCAL AND STATE NUMBERS

Short sales have become an important — and growing — part of the local and state real estate economies:• Homeowners in Sarasota and Manatee counties completed 9,586 short sales from 2007 through the first half of 2012, according to foreclosure analyst RealtyTrac Inc.• There were among the 258,927 short sales closed statewide during the same period.• There were 58,685 short sales completed in Florida last year. In the first six months of 2012, there were 32,361, RealtyTrac reported. At that pace, the total tally for this year should eclipse 2011.• Sarasota County has recorded 5,580 short sales in the past 5 1/2 years, including 1,321 last year and 676 through June of this year.• Manatee County has seen 4,006 short sales over the same time, with 993 in 2011 and 485 so far this year.

But they stand to lose that benefit after Dec. 31, a threat not only to their financial stability but to the growing popularity of short sales as an escape from foreclosure.

Under a 2007 law, homeowners do not have to pay federal income taxes on mortgage debt forgiven by lenders on short sales, loan modifications or foreclosures.

Such debt relief was previously taxed as income. Unless the Mortgage Forgiveness Debt Relief Act is extended into next year, borrowers will return to paying taxes on the amount written off after a short sale or on the reduced principal of a loan.

“It’s a huge deal for Florida,” said Trey Price, public policy representative with Florida Realtors. “So many people are having to take this way out. Taxing their income from the forgiveness in a short sale is like putting salt on the wound.”

David Landers said the tax break was a major motivation in short selling his Lakewood Ranch condominium in June, one of the 1,161 short sales in Sarasota and Manatee counties during the first half of 2012.

Landers, an environmental scientist for a consulting firm, and his wife started with a $236,000 mortgage on the condo they bought in 2005, as real estate values peaked. They short sold for $77,000, giving them what could have been been $150,000 in taxable income, or a tax bill of more than $37,000.

“If I had to pay income taxes on $150,000, I would have been bankrupt,” Landers said. “Knowing I was not on the hook for that was a big help.”

Sarasota real estate attorney Nancy Cason said the potential loss of the tax break has sparked a wave of short selling.

“They don’t want to take the risk that it won’t be extended,” Cason said. “A lot of clients in the past six months have been putting their homes on the market and aggressively pursuing the short-sale option.”

She believes lenders will be pressured to approve and close short sales by year end if it appears the law will sunset.

“If we don’t have a good feeling that it is going to be extended, December is going to be a crazy month for closings,” she said.

Steve DuToit, a Realtor with Keller Williams Realty in Sarasota, has not seen any rush to complete short sales before the year-end deadline, but perhaps because the looming tax consequences have not received much notice.

“It would place quite a burden on anyone that is short selling their home,” DuToit said. “Obviously, most people who are short selling don’t have stacks of cash sitting around to pay income taxes on that.”

Congress will now consider extending the law during its lame-duck session. The Senate Finance Committee has approved a package that would add another year to the tax break, but the House has not taken up any of a number of tax issues facing year-end deadlines.

Sarasota attorney Evan Berlin believes the impact of losing the tax break would be “modest to negligible.” Most homeowners who go through the short sale or foreclosure process have no other choice, he said.

“Although the issue of taxes comes up often, it is not typically the determining factor when someone is otherwise unable or unwilling to make their payments anyway,” Berlin said.

Sabrina Sullivan, who specializes in short sales with Hunt Brothers Realty in Sarasota, thinks the exemption will be extended to coincide with generous new guidelines from Fannie Mae and Freddie Mac to stimulate short sales by underwater homeowners.

“This helps a lot of people,” she said. “Otherwise, it would be a hardship that would just stall short sales.”

Short sales have become an increasingly popular exit strategy for underwater homeowners here and throughout the state.

Homeowners in Sarasota and Manatee counties completed 9,586 short sales from 2007 through the first half of 2012, according to foreclosure analyst RealtyTrac. They were among the 258,927 short sales closed statewide in the same period.

There were 58,685 short sales completed in Florida last year and 32,361 through the first six months of this year, RealtyTrac reported.

Sarasota County has recorded 5,580 short sales in the past 5 1/2 years, including 1,321 last year and 676 through June of this year. Manatee County has seen 4,006 short sales over the same time, with 993 in 2011 and 485 so far this year.

In a short sale, the bank permits a home to sell for less than the value of the mortgage. The bank forgives the unpaid balance of the loan, which typically is less than the cost of a foreclosure.

The current tax exemption applies to a maximum of $2 million of forgiven debt for married taxpayers. Second mortgages used for non-household spending are not eligible.

The tax break can be lucrative.

The National Association of Realtors estimates the tax savings from the exemption came to least $1 billion in 2011. The group plans a major push to get the law extended for another year.

A taxpayer in a 25 percent tax bracket who has $75,000 in mortgage debt forgiven would avoid $18,750 in taxes. A bigger savings might push some taxpayers into higher tax brackets.

Losing the exemption would be another financial blow to already struggling homeowners, said Price of the state Realtors group.

“It’s not going to help them pay for the first and last month and security deposit if they are going into a rental property,” Price said. “It’s not going to help them with a down payment when they buy again in the future.”

Some fear that losing the tax exemption could dampen the enthusiasm for short sales, even disrupting the $25 billion national mortgage settlement with five major lenders designed to encourage those sales and principal reductions.

“There would be less incentive for homeowners to short sell,” Cason said. “The goal is to resolve the deficiency and get out of the situation without owing any more money.”

Even without the tax break, attorney Berlin believes short sales for beleaguered homeowners who are not bankruptcy candidates are still the best way to go. “Even if there would be tax consequences down the road, most would prefer to pay taxes on forgiven debt rather than the full amount of the deficiency,” he said. “And a good tax adviser might be able to employ strategies to address potential tax liability.”

<p>Struggling Southwest Florida homeowners have saved thousands of dollars from a popular tax break on forgiven mortgage debt.</p><p>But they stand to lose that benefit after Dec. 31, a threat not only to their financial stability but to the growing popularity of short sales as an escape from foreclosure.</p><p>Under a 2007 law, homeowners do not have to pay federal income taxes on mortgage debt forgiven by lenders on short sales, loan modifications or foreclosures.</p><p>Such debt relief was previously taxed as income. Unless the Mortgage Forgiveness Debt Relief Act is extended into next year, borrowers will return to paying taxes on the amount written off after a short sale or on the reduced principal of a loan.</p><p>“It's a huge deal for Florida,” said Trey Price, public policy representative with Florida Realtors. “So many people are having to take this way out. Taxing their income from the forgiveness in a short sale is like putting salt on the wound.”</p><p>David Landers said the tax break was a major motivation in short selling his Lakewood Ranch condominium in June, one of the 1,161 short sales in Sarasota and Manatee counties during the first half of 2012.</p><p>Landers, an environmental scientist for a consulting firm, and his wife started with a $236,000 mortgage on the condo they bought in 2005, as real estate values peaked. They short sold for $77,000, giving them what could have been been $150,000 in taxable income, or a tax bill of more than $37,000.</p><p>“If I had to pay income taxes on $150,000, I would have been bankrupt,” Landers said. “Knowing I was not on the hook for that was a big help.”</p><p>Sarasota real estate attorney Nancy Cason said the potential loss of the tax break has sparked a wave of short selling.</p><p>“They don't want to take the risk that it won't be extended,” Cason said. “A lot of clients in the past six months have been putting their homes on the market and aggressively pursuing the short-sale option.”</p><p>She believes lenders will be pressured to approve and close short sales by year end if it appears the law will sunset.</p><p>“If we don't have a good feeling that it is going to be extended, December is going to be a crazy month for closings,” she said.</p><p>Steve DuToit, a Realtor with Keller Williams Realty in Sarasota, has not seen any rush to complete short sales before the year-end deadline, but perhaps because the looming tax consequences have not received much notice.</p><p>“It would place quite a burden on anyone that is short selling their home,” DuToit said. “Obviously, most people who are short selling don't have stacks of cash sitting around to pay income taxes on that.”</p><p>Congress will now consider extending the law during its lame-duck session. The Senate Finance Committee has approved a package that would add another year to the tax break, but the House has not taken up any of a number of tax issues facing year-end deadlines.</p><p>Sarasota attorney Evan Berlin believes the impact of losing the tax break would be “modest to negligible.” Most homeowners who go through the short sale or foreclosure process have no other choice, he said.</p><p>“Although the issue of taxes comes up often, it is not typically the determining factor when someone is otherwise unable or unwilling to make their payments anyway,” Berlin said.</p><p>Sabrina Sullivan, who specializes in short sales with Hunt Brothers Realty in Sarasota, thinks the exemption will be extended to coincide with generous new guidelines from Fannie Mae and Freddie Mac to stimulate short sales by underwater homeowners.</p><p>“This helps a lot of people,” she said. “Otherwise, it would be a hardship that would just stall short sales.”</p><p>Short sales have become an increasingly popular exit strategy for underwater homeowners here and throughout the state.</p><p>Homeowners in Sarasota and Manatee counties completed 9,586 short sales from 2007 through the first half of 2012, according to foreclosure analyst RealtyTrac. They were among the 258,927 short sales closed statewide in the same period.</p><p>There were 58,685 short sales completed in Florida last year and 32,361 through the first six months of this year, RealtyTrac reported.</p><p>Sarasota County has recorded 5,580 short sales in the past 5 1/2 years, including 1,321 last year and 676 through June of this year. Manatee County has seen 4,006 short sales over the same time, with 993 in 2011 and 485 so far this year.</p><p>In a short sale, the bank permits a home to sell for less than the value of the mortgage. The bank forgives the unpaid balance of the loan, which typically is less than the cost of a foreclosure.</p><p>The current tax exemption applies to a maximum of $2 million of forgiven debt for married taxpayers. Second mortgages used for non-household spending are not eligible.</p><p>The tax break can be lucrative.</p><p>The National Association of Realtors estimates the tax savings from the exemption came to least $1 billion in 2011. The group plans a major push to get the law extended for another year.</p><p>A taxpayer in a 25 percent tax bracket who has $75,000 in mortgage debt forgiven would avoid $18,750 in taxes. A bigger savings might push some taxpayers into higher tax brackets.</p><p>Losing the exemption would be another financial blow to already struggling homeowners, said Price of the state Realtors group.</p><p>“It's not going to help them pay for the first and last month and security deposit if they are going into a rental property,” Price said. “It's not going to help them with a down payment when they buy again in the future.”</p><p>Some fear that losing the tax exemption could dampen the enthusiasm for short sales, even disrupting the $25 billion national mortgage settlement with five major lenders designed to encourage those sales and principal reductions.</p><p>“There would be less incentive for homeowners to short sell,” Cason said. “The goal is to resolve the deficiency and get out of the situation without owing any more money.”</p><p>Even without the tax break, attorney Berlin believes short sales for beleaguered homeowners who are not bankruptcy candidates are still the best way to go. “Even if there would be tax consequences down the road, most would prefer to pay taxes on forgiven debt rather than the full amount of the deficiency,” he said. “And a good tax adviser might be able to employ strategies to address potential tax liability.”</p>